This Year’s Model

I’ve started Piketty’s new book, but just finished the first chapter (intro.)  Here are a few initial observations:

1.  He has a fairly left-wing worldview (albeit certainly not Marxist.)

2.  He says that “all the historical data” shows that real wages in Britain did poorly in the first 1/2 to 2/3rds of the 19th century.  I’m no expert here, but that’s not what I was taught.  I was taught (at both Wisconsin and Chicago) that the data conflicted. Some data showed what Piketty claims, and some data suggested that real wages rose, that British workers did better than peasants, and also better than people on the continent.  Does anyone know whether all the data supports Piketty’s claim?

3.  He is rather dismissive of those he disagrees with.  At Econlog I extensively discuss his mischaracterization of Simon Kuznets’ views.  That’s the post to read if you are a visitor from MR and only have time for one.

4.  He says the wealth/income ratio in the late 19th century was 600%, “which is a lot.”  That doesn’t seem like a lot to me.  It will be interesting to see if he later explains why it is a lot.

5. I’m not quite sure what motivated him to write the book.  Is it a study of capital, of wealth, or of economic inequality?  The title suggests capital, the intro suggests he’s more interested in wealth and income inequality.

6.  He says that two key graphs motivate his study.  One shows the U-shaped pattern in income inequality over time, and the other shows a U-shaped pattern in the ratio of private “capital” and income. The second graph has been challenged by Chris Giles.  Then he gets to the model.

If, moreover, the rate of return on capital remains significantly above the growth rate for an extended period of time (which is more likely when the growth rate is low, though not automatic), then the risk of divergence in the distribution of wealth is very high.

This fundamental inequality, which I will write as r > g  (where r stands for the average annual rate of return on capital, including profits, dividends, interest, rents, and other income from capital, expressed as a percentage of its total value, and g stands for the rate of growth of the economy, that is the annual increase in income or output), will play a crucial role in this book. In a sense, it sums up the overall logic of my conclusions.

I had read numerous reviews of the book, pro and con, before I started reading it, so I was well aware of the importance Piketty placed on the r > g relationship. When I first heard about this model it struck me as absurd. I started reading the book, thinking Piketty would provide some sort of persuasive explanation for the model. After all, the book is been very well reviewed, for the most part. And yet right after these two paragraphs, here’s what I found:

When the rate of return on capital significantly exceeds the growth rate of the economy (as it did through much of history until the nineteenth century and as is likely to be the case again in the twenty-first century), then it logically follows that inherited wealth grows faster than output and income.

This is even more absurd than I expected. It does not logically follow that inherited wealth grows faster than output and income. It just doesn’t. It’s wrong. I really don’t know what else to say, other than it’s wrong. At some level the Piketty probably understands his claim was incorrect, as he contradicts himself in the very next sentence:

People with inherited wealth need save only a portion of their income from capital to see the capital grow more quickly than the economy as a whole.

OK, so doesn’t logically follow, you need to make assumptions about savings. Does that help? Not really, because the model is still absurd. And that’s because the assumptions that you’d need to make about savings are utterly implausible. To see what’s wrong with Piketty’s model all you have to do is rewrite the “logically follows” sentence, replacing “inherited wealth” with specific families. Here is what Piketty claims is the “logical” model that lies at the very core of the book, rewritten by me:

When the rate of return on capital significantly exceeds the growth rate of the economy (as it did through much of history until the 19th century and as is likely to be the case again in the 21st century), then it logically follows that the wealth of the grandchildren of Bill Gates, Warren Buffet, Larry Ellison and all the other billionaires, will exceed their wealth.  Indeed the wealth of the grandchildren will exceed their wealth by more that (1 + g) to the n power, where n is the number of years between now and when these billionaire’s grandchildren reach the same age. That’s about 60 years.

Using plausible growth rates, Piketty is saying that the grandchildren of these super-billionaires will “logically” be at least 4 times wealthier on average, or even more, even in real terms.  He thinks that is the implication of r > g.  Now to be fair, that may well be true in a few cases.  But is that the expected result?  Obviously not.  Do you expect Bill Gates’ grandkids to eventually have $200 billion in 2014 dollars?

And the reason is obvious.  Billionaires accumulate vast fortunes for a reason.  They want to do something with the money.  They want to do lots of things with their money.  They have grand plans for a billionaire lifestyle.  They have grand philanthropic interests.  And yes, they also want to give some money to their children.  Piketty continues:

Under such conditions, it is almost inevitable that inherited wealth will dominate wealth amassed from a lifetime’s labor by a wide margin, and the concentration of capital will  attain extremely high levels–levels potentially incompatible with the meritocratic values and principles of social justice fundamental to modern democratic societies.

No it isn’t.  What more can I say?

So why did Piketty make this mistake?  Perhaps he was too influenced by European culture.  In most European countries it is illegal for billionaires to give more than 1/2 of their fortunes to charity.  So although Piketty’s model won’t even be true for Europe, it will be closer to the truth in Sweden than in the US.  As an analogy, Keynes model was wrong, but most people think it was “less wrong” for depression-type periods with near zero rates, such as Keynes was familiar with in the 1930s, than for the economy at full employment.

How big of a problem is this?  That depends.  For the policy issues of interest to progressives, it may not be much of a problem at all. Even though Piketty’s model is wrong, his predictions may well be correct.  Wealth may grow increasingly unequal.  Perhaps wealth redistribution is needed.

However I do think it’s a big problem for Piketty’s book. If the book is a model plus data plus policy advocacy, then in my view he’s lost one third of the book in the opening chapter. In later posts I’ll let you know whether he collects the data that is most relevant to the issue of economic inequality, and whether he has good arguments for or against the standard remedy of a progressive consumption tax, with zero taxes on capital.

PS.  After writing this I noticed a book edited by Joel Mokyr has a article by Deirdre McCloskey that claims British real incomes rose by two and a half times between 1780 and 1860, but that’s an average, and doesn’t account for changes in income distribution.  Another article by Clark Nardinelli suggests that real incomes doubled between 1760 and 1860 and the share of income going to the bottom 65% fell from 29% to 25%.  But even that suggest a substantial gain for average people.  So I’m not sure that “all the historical data” shows what Piketty claims it shows.


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48 Responses to “This Year’s Model”

  1. Gravatar of Matt McOsker Matt McOsker
    2. June 2014 at 05:44

    Have not read the book yet, though I can imagine the solution to inequality is always higher taxes – and I don’t think higher taxes reduce inequality absent a corresponding fiscal policy transfer (versus just reducing treasury issuance). Does he cover periods such as the Clinton tax increases (and later cap gains reduction, though he did remove the medicare income cap) and the rising inequality that corresponded?

    On a separate note:
    I assume this is also on your reading list?

    Monetary Policy with Interest on Reserves
    John H. Cochrane
    May 26, 2014
    http://www.moslereconomics.com/wp-content/powerpoints/2014CochraneMonetaryPolicywithInterestonReserves.pdf

    Some commentary at Warren Mosler’s Site
    http://moslereconomics.com/2014/05/30/mario-seccareccia-on-cochranes-paper/

  2. Gravatar of Matt McOsker Matt McOsker
    2. June 2014 at 06:02

    Here is an FT piece by James Galbraith on the book, and it is titled:
    Policy, not capitalism, is to blame for the income divide

    Another source – http://america.aljazeera.com/opinions/2014/5/inequality-assetpricesstockspikettyeconomics.html

    “This is precisely what the data show. James Galbraith and J. Travis Hale, two economists specializing in the study of inequality, measured changes in income disparity between counties in the U.S. in their paper “The Evolution of Economic Inequality in the United States, 1969–2012” and compared them with the movements in the stock market in the same period and found that, lo and behold, the two were well correlated over 35 years and almost exactly correlated from 1992 to 2004.”

    I know some here may not be a Galbraith fan, but he has done a lot of work on inequality.

  3. Gravatar of John Thacker John Thacker
    2. June 2014 at 06:15

    And just to annoy you even further, Scott, Piketty told CNBC that relying so much on QE is a mistake, since the Fed printing money helps mostly the top 1%, and that fiscal policy should be used instead. Though he’s not much worse than the average economist in thinking that the Fed has done all it could do.

  4. Gravatar of Kevin Donoghue Kevin Donoghue
    2. June 2014 at 06:22

    “I’m not quite sure what motivated him to write the book. Is it a study of capital, of wealth, or of economic inequality? The title suggests capital, the intro suggests he’s more interested in wealth and income inequality.”

    By capital he simply means wealth:

    “To be clear, although my concept of capital excludes human capital (which cannot be exchanged on any market in nonslave societies), it is not limited to “physical” capital (land, buildings, infrastructure, and other material goods). I include “immaterial” capital such as patents and other intellectual property, which are counted either as nonfinancial assets (if individuals hold patents directly) or as financial assets (when an individual owns shares of a corporation that holds patents, as is more commonly the case). More broadly, many forms of immaterial capital are taken into account by way of the stock market capitalization of corporations.” (Page 49)

    If you can, forget everything you’ve seen in reviews etc. Many comments on the book are based on misreading.

  5. Gravatar of MG MG
    2. June 2014 at 06:45

    Your PS raises — to me — the obvious. Now that Piketty has re-introduced the whole world with the collectivist view of the last few centuries of economic history, when is McCloskey going to get the attention/opportunity she deserves, to introduce a broader audience to the free-markets narrative — in my book, wa view of what actually happened.

  6. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    2. June 2014 at 07:05

    I can’t even think of another economics book that has been so thoroughly demolished by the professionals (not just by political hacks who are on the other ideological side).

  7. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    2. June 2014 at 07:24

    Piketty would learn more about ‘capital’, than is in his book, by listening to the five minute audio at the top of this article;

    http://kuow.org/post/minimum-wage-limbo-keeps-small-business-owners-night

    ‘As the Seattle City Council continues to debate a plan to phase in a $15 minimum wage, and as minimum wage advocates gather signatures to put an even stronger measure on the November ballot, businesses in the city are finding themselves in an uncomfortable position: in limbo.

    ‘Many businesses report putting off hiring, expansion or investment decisions until the outcome of the minimum wage debate is clear.

    ‘“People are just scared and they don’t know what’s going to happen,” said Angela Stowell, who co-owns 10 restaurants in the city. “They’re paralyzed by the uncertainty.”’

    That’s the reality of investing; you could lose your investment. If that prospect is strong enough, you don’t invest.

  8. Gravatar of ssumner ssumner
    2. June 2014 at 07:39

    Matt, I made a few comments on the Cochrane article about a week ago.

    I think the IP laws (which are excessive) are a big factor in the growing income inequality. So yes, it’s not just “capitalism.”

    Thanks Kevin, I agree that reviews can be misleading. I’ll try to form my own views as I progress. For instance, I did not see other reviews notice the gross mischaracterization of Kuznets that I discuss over at Econlog. So I agree that one cannot rely on others.

    MG, I certainly liked the first chapter of Bourgeois Virtues much more than the first chapter of Capital.

    Patrick, Yes, I’ve seen lots of negative reviews–but I’ll withhold judgment.

  9. Gravatar of ssumner ssumner
    2. June 2014 at 07:40

    Patrick, I agree about the $15 wage.

  10. Gravatar of benjamin cole benjamin cole
    2. June 2014 at 07:46

    I an in Scott Sumner’s camp on this one—maybe even more than Scott. My sense is that higher global incomes and savings rates are leading to capital gluts. Capital is no longer scarce (as seen by the $100 million oil paintings or the $2 billion for the Clippers). My guess is that this will depress yields and returns. We should also see spasmodic overinvestment in hot sectors, the hunt for return.
    If we want to help ordinary people we should concentrate on ramping up aggregate demand. In other words, lots more QE.

  11. Gravatar of Matt McOsker Matt McOsker
    2. June 2014 at 08:08

    Thanks Scott I initially ran a search but it did not show. I will troll the archive from last week.

  12. Gravatar of ssumner ssumner
    2. June 2014 at 08:22

    Matt, Here:

    http://www.themoneyillusion.com/?p=26841

  13. Gravatar of Doug M Doug M
    2. June 2014 at 09:43

    As I understand it, in the Piketty model, if the return on savings (or savings put at risk through the stock market, etc.) is greater than NGDP growth then the rich get richer faster than the middle or working class gets richer.

    Does this hold up through history. Throughout the 20th century the stock market return has been a fair margin higher than NGDP growth, but are the Vanderbilt or Rockefeller fortunes greater today than they were at the time of the death of the patriarch? These forturnes get divided among multiple heirs. Most of the great fortunes seeded large charitable foundations, which could be argued give political influence to the heirs even if they cannot be used directly by those heirs.

    While I don’t have the data, I would guess that these pots of money summed across all the heirs and foundations is smaller today as a % of GDP, smaller in constant dollars, and probably smaller in real dollars.

    When we look at the Forbes 400, there are Walton’s, but I don’t see many others who are their by there due to their inheritance.

    Perhaps the Rothschild’s are the only “money family” to successfully hold the family fortune over several generations, and even that seems to be diluting.

  14. Gravatar of Scott Sumner Scott Sumner
    2. June 2014 at 11:28

    Doug, There are actually several issues here:

    1. Does r > g imply greater wealth inequality over time?

    No.

    2. Is wealth inequality increasing?

    Quite possibly yes.

    His conclusion might be right, but the model is not helpful. Better to ignore the model and focus on the data.

  15. Gravatar of Mark A. Sadowski Mark A. Sadowski
    2. June 2014 at 14:37

    “He says that “all the historical data” shows that real wages in Britain did poorly in the first 1/2 to 2/3rds of the 19th century.”

    Really? That’s interesting because it’s not true. If anything, there’s been an epic duel (well, “epic” for academics) going on between the “optimists” and the “pessimists” on this very question since the early 1980s.

    Lindert and Williamson (1983) argued that real wages soared after Waterloo. Feinstein (1998) and Allen (2001) argued that real wages were stagnant from 1780 and 1830 and after that they rose much more slowly than output. Gregory Clark (2005) used new price evidence to argue that real wages grew more rapidly than Feinstein and Allen thought. Allen responded in 2007 by combining Clark’s price index with Feinstein’s nominal wage estimates to push the pendulum back towards pessimism.

    Read Allen’s introduction to get a flavor of the fight back and forth:

    http://economics.ouls.ox.ac.uk/12119/1/paper314.pdf

    For what it is worth, measuringworth.com uses Clark’s RPI and nominal wage estimates. They show that real wages rose by 75% from 1800 to 1870 or at an average annual rate of 0.8%.

    http://www.measuringworth.com/ukearncpi/

    However, I would say that the consensus is that there is no consensus. For Piketty to say otherwise is interesting.

  16. Gravatar of Mike Sax Mike Sax
    2. June 2014 at 19:10

    Why should the sky fall if Seattle has a $15 minimum wage-which would be phased in anyway? In 1969 the national rate adjusted for inflation and productivity gains was $16 an hour and the sky surely wasn’t falling in the economy then.

  17. Gravatar of Mike Sax Mike Sax
    2. June 2014 at 19:20

    “I can’t even think of another economics book that has been so thoroughly demolished by the professionals (not just by political hacks who are on the other ideological side).”

    Then I guess you never heard of Rogoff and Reinhart. Ok-R-R was a paper rather than a ‘book?’ But in fact Piketty hasn’t been by a slew of ‘professionals.’

    It’s clear that the Right hates the book but there has been as least as many positive as negative reviews and most of the negative reviews have been way off base like that FT piece.

  18. Gravatar of gofx gofx
    2. June 2014 at 19:26

    @Mike Sax: Because the current minimum wage appears already to be above the market clearing level. Stay tuned for another episode of “Amazing Advances in Automation”.

  19. Gravatar of Anonymous Anonymous
    2. June 2014 at 20:14

    Mike Sax,

    A. Piketty’s book has been demolished by a slew of professionals, and almost every day there is another review pointing out its flaws. Even liberal and progressive economists are publicly exposing its errors.

    B. It’s clear as a leftist you like the book, and feel compelled to defend it by quibbling with the criticisms and making mountains out of molehills, but most of the negative reviews have been on base. The data and assumptions in the book is just garbage. He made up numbers.

  20. Gravatar of anon/portly anon/portly
    2. June 2014 at 21:31

    The Sumnerian take reminds me of this one (linked to by TC awhile back):

    http://updatedpriors.blogspot.com/2014/03/capital-in-partial-equilibrium.html

  21. Gravatar of Mattias Mattias
    2. June 2014 at 21:50

    I don’t know if you’ve seen this but George Cooper has some interesting points about Piketty’s model that he claims can be summed up in three key relationship:

    The inequality r > g

    The first fundamental law of capitalism: α = r × β

    The second fundamental law of capitalism: β = s/g

    He then checks what this model implies in a low growth environment, and the results get completely absurd. E.g. at 0,25% growth -300% of the national income goes to workers. That seems a bit low…

    The link is :

    http://georgecooper.org/2014/04/29/does-pikettys-r-g-hold-in-a-low-growth-world/

  22. Gravatar of Mike Sax Mike Sax
    2. June 2014 at 23:49

    “It’s clear as a leftist you like the book, and feel compelled to defend it by quibbling with the criticisms and making mountains out of molehills, but most of the negative reviews have been on base. The data and assumptions in the book is just garbage. He made up numbers.”

    It’s clear you are projecting. As a Rightist you feel compelled to trash the book by latching onto the quibbles of people like Chris Giles. In fact plenty of reviewers have praised the book as Scott himself eludes to. Again, the positive reviews are at least equal to the negative reviews.

    I don’t know whose supposed to have demolished the book as you didn’t list any names.

  23. Gravatar of Mike Sax Mike Sax
    2. June 2014 at 23:55

    Well gofx its hardly a utopia for workers now as so many jobs don’t pay anywhere near a livable wage. You might think that $8 is above market clearing but it’s way below the level that anyone could even think of living off of.

    At least in Seattle anyone who has a job will have a livable wage. I don’t buy the scare stories that no one will ever get hired again as we hear them every time there’s a MW hike.

    The problem today is not just unemployment but that so many of the jobs that are available pay nowhere near a livable wage anyway.

  24. Gravatar of Jeremy Goodridgde Jeremy Goodridgde
    2. June 2014 at 23:55

    Scott,

    I understand you disagree, but can you please not contribute to the shrill way economists seem to disagree with each other — no need to insult Piketty’s intelligence. Statements like, “The reason is obvious” and “the model is absurd” are totally gratuitous and just serve to imply that Piketty is a moron — I mean if it’s so obvious then how come he didn’t see it. There are ways to say that you think the model is wrong without being insulting.

  25. Gravatar of Mike Sax Mike Sax
    2. June 2014 at 23:57

    Patrick I’m honestly curious: have you read Piketty’s book or just negative reviews of it?

  26. Gravatar of Mike Sax Mike Sax
    3. June 2014 at 00:28

    Seattle’s $15 MW has conservatives sleepless in Seattle

    http://diaryofarepublicanhater.blogspot.com/2014/06/sumner-sleepless-over-seattles-15.html

  27. Gravatar of Daniel Daniel
    3. June 2014 at 04:32

    Oh look, it’s Mike Sax on the rescue, always willing to argue the sky is pink if he thinks it somehow advances the commie cause.

  28. Gravatar of ssumner ssumner
    3. June 2014 at 05:12

    Thanks Mark, Very informative.

    Mike, I thought liberals also opposed the $15 minimum wage?

    Jeremy, If you read my Econlog post you will understand the tone of my comments.

  29. Gravatar of mikef mikef
    3. June 2014 at 06:07

    I read that Bernie Sanders said that the Walton family’s wealth was equivalent to about the lower 40% of Americans combined…which seemed like an incredible figure to me…until I realized that if your wealth is positive that you are probably higher than the bottom 20%…which have a negative or near zero wealth….

    It seams to me that if you are looking at wealth that the lower third of any society is going to have next to no wealth…because either a) they are young and have not had a chance to save much or b) they are only working for the weekend…

    A more relevant measure for this group is income. The GINI index for individual income has been the same since 1960 and actually hit a 55 year low in 2008. Family income has been approaching the inequality of individual income. But this is due to makeup of the family…maybe increases in child credits could help there….

    For wealth, I think how the top 25% are doing compared to the top 0.1% is a more valuable statistic. The only thing I worry about with the concentration of wealth is the potential concentration of power and the evolution of a fair and equal playing field to a crony, banana republic, capitalism….strong property rights, independent judiciary, and democratic institutions are key to preventing this….

  30. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    3. June 2014 at 06:48

    Mike Sax emulates Ninotchka;

    ‘At least in Seattle anyone who has a job will have a livable wage.’

    There will be fewer Seattleites with jobs, but better off Seattleites.

  31. Gravatar of TravisV TravisV
    3. June 2014 at 07:04

    Bank Of America Merrill Lynch Is ‘Comfortable With The Thrust’ Of Piketty’s Analysis

    http://www.businessinsider.com/bofa-merrill-lynch-backs-piketty-2014-5

  32. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    3. June 2014 at 07:18

    From the BofA article;

    ‘…”His questionable assumptions do not detract from the power of his thesis.”‘

    The power of faith!

  33. Gravatar of Luis Pedro Coelho Luis Pedro Coelho
    3. June 2014 at 07:29

    mikef: it’s even worse than that: everybody has more than the bottom third combined (even if you’re in debt) because the bottom third combine to a large negative number.

  34. Gravatar of TallDave TallDave
    3. June 2014 at 08:05

    This is even more absurd than I expected. It does not logically follow that inherited wealth grows faster than output and income. It just doesn’t.

    It’s fun to imagine the world if this were actually true — the Rockefellers would still be the richest people in the world, there would have been no Information Age since obviously no near-zero-capital company started in a garage could become a billion-dollar concern, etc.

    Under such conditions, it is almost inevitable that inherited wealth will dominate wealth amassed from a lifetime’s labor by a wide margin, and the concentration of capital will attain extremely high levels–levels potentially incompatible with the meritocratic values and principles of social justice fundamental to modern democratic societies.

    Even with >50% estate taxes in most of the OECD? On top of C Corp capital already being taxed three times (income, capital gains, and dividend)? The mind boggles.

    It’s like Piketty just completely missed the development of the microprocessor or something.

  35. Gravatar of TallDave TallDave
    3. June 2014 at 08:14

    You might think that $8 is above market clearing but it’s way below the level that anyone could even think of living off of.

    If only China and India would enact 15 MW, they could join the OECD tomorrow.

    You know what’s worse than living on $8/hr? Not having a job at all because your labor is only worth $8/hr and it’s illegal for anyone to pay you that much.

  36. Gravatar of Eric Falkenstein Eric Falkenstein
    3. June 2014 at 08:48

    What does he say about taxes?

    Where does he get his ‘r’ data from (given it’s bonds and equity, corp&govt, real estate, etc.)?

  37. Gravatar of Turpentine Turpentine
    3. June 2014 at 09:26

    I’m not sure why you use these micro examples (Gates et al.) to contradict Piketty. Everyone seems to understand that r>g is supposed to be about macro implications of rising wealth vs GDP, not about whether Gates’ kids will be richer than Gates. It looks like even that is hard to generate in a standard Solow-type model, but still, let’s now bring it down by mischaracterizing its supposed implications.

  38. Gravatar of Major-Freedom Major-Freedom
    3. June 2014 at 16:19

    Nassim Taleb weighs in:

    http://www.fooledbyrandomness.com/notebook.htm

    Ouch.

  39. Gravatar of Cliff Cliff
    3. June 2014 at 18:49

    Turpentine,

    Inheritance is exactly the mechanism Piketty proposes to explain the result of r>g causing increasing inequality. It is quite absurd to criticize Sumner on this basis. The macro explanation can’t hold without micro underpinnings. It can’t simultaneously be true that no specific wealthy people leave large inheritances AND that because of r>g inherited wealth will cause massive increases in wealth inequality.

  40. Gravatar of Pyrmonter Pyrmonter
    3. June 2014 at 19:53

    Didn’t Max Hartwell settle the early 19C wages debate 50 years ago?

    http://web.uvic.ca/~jfedorak/Hart2.pdf

  41. Gravatar of Tom Aubrey Tom Aubrey
    3. June 2014 at 21:28

    @Mark A. Sadowski
    The UK wage data from 1850 is more robust that’s for sure. The Bank of England have compiled an excellent data set which is on their website. It is worth pointing out that real wages grew by 1.1% pa between 1870-1890 and then fell back to 0.7% pa from 1890-2010.

  42. Gravatar of Boussard Boussard
    4. June 2014 at 01:49

    I’m sorry but Chris Giles does not challenge the U-shape pattern of the ratio of capital to income, only the U-shape pattern of wealth inequality in Britain. Basically, for Piketty’s theory of increasing income inequality due to capital income inequality to hold, you need a falling growth not matched by a corresponding fall in the gross savings rate and in the rate of return, so that

    1) Steady-state capital/income s/(g+d) (with d depreciation rate) increase
    2) Share of income to capital owners r*s/(g+d) increase.
    3) Wealth is unequally distributed (no necessarily increasing), so that a rise in the share of income to capital leads to a rise in income inequality.
    There is really nothing to say against 1, 2, 3 which really are direct consequences of Piketty’s assumptions

    The key assumption is r times s falling by less than g + d. Many growth model assume a constant s over time, and Piketty argues that r does not fall as much as g, so there you go. His point is that other things equal, capital income inequality will probably increase if growth slows. You can argue that Bill Gates will distribute is money (so you should see that in decreasing wealth inequality. Do you?), or that something will render all capital obsolete or destroy it (increasing d), or that the rate of return will fall, or that billionaires will start spending more of their income (falling r times s). All assumptions which are not the baseline scenario.

    The stuff with r>g speaks to people who understand that wealth grows faster than income if r>g, but is not the key point, because you indeed need something about savings behavior. Which is in Piketty’s book, if you manage to read it entirely.

  43. Gravatar of ssumner ssumner
    4. June 2014 at 05:53

    Turpentine, I realize that it is a macro thesis, but these micro examples make it easier to see the absurdity of the claim. You could substitute any other billionaire in for Gates, as I indicated.

    Again, I find it quite plausible that wealth will get increasingly unequal, but r > g has nothing to do with it.

    Broussard, Yes, my mistake on Giles.

    You said:

    “The stuff with r>g speaks to people who understand that wealth grows faster than income if r>g, but is not the key point, because you indeed need something about savings behavior. Which is in Piketty’s book, if you manage to read it entirely.”

    Again, that inequality does not imply that wealth grows faster than income. Regarding my supposed oversight of the saving assumption, here’s what I said:

    “OK, so doesn’t logically follow, you need to make assumptions about savings. Does that help? Not really, because the model is still absurd. And that’s because the assumptions that you’d need to make about savings are utterly implausible.”

    Your other comments are interesting, but have no bearing on anything I said in this post. The intro to the book did not discuss the impact of changes in r and g, and I did not address that issue. The book may well be excellent, but the intro did a poor job of introducing his model.

  44. Gravatar of ezra abrams ezra abrams
    5. June 2014 at 19:42

    these debates about piketty are pointless, a high class form of navel gazing, or an intellectual version of The National Enquirer

    we all know what the problem is: the wealthy have way way to much money and power

    and the answer is pretty obvious: much higher marginal rates, taxing capital as ordinary income (you can dig up the quote by Andrew Mellon, of all people, on why cap gains rates should be higher then income rates)
    etc
    it ain’t hard; all this discussion about piketyy is just a waste of time

  45. Gravatar of Declan Declan
    5. June 2014 at 20:42

    The models linking r>g and the equilibrium wealth distribution are referenced on p.61 of the online technical appendix:

    “Pareto laws are generated by dynamic process with multiplicative shocks, for instance because portfolios and wealth are multiplied by a random multiplicative shock from a period or a generation to another. Intuitively, the bigger the gap r – g is, the more this shock generates a high concentration of wealth and thus the higher the coefficient b is. The mathematical equations to determine this coefficient b depending on r – g, as well as the corresponding technical references are available in these lecture notes. The corresponding models were developed by Champernowne in 1953 and extended by several authors, such as Stiglitz, Cowell and Nirei. Meade developed a similar intuition in his book published in 196434. What needs to be emphasized is that small variations in the gap r-g (due to differences in the tax rate for the wealthiest for example) can explained huge variations in the coefficient b and thus in the concentration of wealth. For numerical simulations see Dell 2005.”

    http://piketty.pse.ens.fr/files/capital21c/en/Piketty2014TechnicalAppendix.pdf

  46. Gravatar of ssumner ssumner
    6. June 2014 at 05:37

    Ezra, Nope, we need progressive consumption taxes. Why double tax future consumption?

    Declan. There are two problems. First he says that r > g implies increasing inequality. That’s flat out 100% wrong, not even debatable. Then he later says there are saving assumptions that when combined with r > g imply increasing inequality. But those saving assumptions are implausible. So all we have left is the data, which we already knew showed increasing inequality.

  47. Gravatar of Dawson Dawson
    10. June 2014 at 00:50

    rnt there many data re: savings rates at various income levels?

  48. Gravatar of Rodney H Rodney H
    24. June 2014 at 18:02

    I’ve started TheMoneyIllusion’s review of chapter 1 of Piketty’s new book, but just finished the first page. Here are a few initial observations:

    1. He has a fairly right-wing worldview (albeit certainly not Nazi.)

    2. He asks whether all the data supports Piketty’s claim that real wages in Britain did poorly in the first 1/2 to 2/3rds of the 19th century. Odd. Why didn’t he just just read on?

    3. He is rather dismissive of those he disagrees with.

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